Asia's top strategist prefers India, China and Gold
(Feb 25, 2009)
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In this issue:
The name Christopher Wood definitely rings a bell or two. Yes, he is one amongst the more famous 'Big Picture' guys who were warning some years ago about the consequences of exploding US mortgage securitisation and more specifically, about the growth of subprime lending. Wood, who is also CLSA's equity strategist, offered his views at a Japanese Forum conference recently. He has outlined a positive view on Asia in general, and India and China in particular.
» CLSA's top strategist likes these asset classes
» S&P downgrades key Indian banks
» Obama projects hope
» Swiss economy in dire straits
» ...and more!
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This is what he had to say - "Asia is the best long-term growth story. If I was putting money into stocks, I would go for China and India." He, however, also had a warning for Asian exporters - "Asia needs to realise the US consumer is not going to go back to spending like they have in recent years."
The asset class Wood seemed the most bullish about was gold, which he believes will more than triple in value by 2010. This belief stemmed from the fact that gold is the only form of money or credit not contaminated by the credit system.
Standard and Poor's (S&P), the rating agency which has in the past failed to exhibit enough credibility in its ratings of subprime assets, seems to be keen to show proactiveness this time around. Besides pulling down India's sovereign ratings, S&P has also downgraded the credit rating of 12 Indian banks citing their association to the health of government's finances. This is because many Indian banks have government ownership and all of them own significant portion of government securities. But what seems to have been ignored is the fact that these banks are relatively much healthier than their counterparts in other parts of the world.
Also, the basic quality of their assets (most of it lent to Indian corporate) stands resilient to the slowdown. The reason - Indian companies are themselves in a far better position today than they were during the previous downturn. At least, the larger ones!
If one was to question the implication of the rating downgrade, it seems purely from a regulatory perspective. As neither the Indian government nor Indian banks nor corporate have any major borrowing plans overseas in the near term, which could be impacted by the ratings. As far as the discerning long term foreign investors are concerned, they surely are known to have the foresight to look beyond credit ratings.
"We will rebuild, we will recover, and the United States of America will emerge stronger than before". These were the words of President Obama in his address to the joint session of the US Congress yesterday. Apart from the need to save banks from going bust, Obama focused on the three long term priorities, clean energy, health care and education.
He said, "The recovery plan and the financial stability plan are the immediate steps we're taking to revive our economy in the short-term. But the only way to fully restore America's economic strength is to make the long-term investments that will lead to new jobs, new industries, and a renewed ability to compete with the rest of the world."
In terms of competing with the rest of the world, Obama cleared his intentions of saving American jobs and pressurising companies that offshore their tasks. He said, "Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders and I know you don't either. It is time for America to lead again."
In seeking support for his policies, he claimed, "While the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade. That would be worse for our deficit, worse for business, worse for you and worse for the next generation. And I refuse to let that happen."
Amidst all his plans for reviving the US economy, Obama gave one startling example of how his fellow Americans can find hope and inspiration amidst the turmoil. He narrated a story, which goes like this, "I think about Leonard Abess, the bank president from Miami who reportedly cashed out of his company, took a $60 million bonus, and gave it out to all 399 people who worked for him, plus another 72 who used to work for him. He didn't tell anyone but when the local newspaper found out, he simply said, "I knew some of these people since I was 7 years old. I didn't feel right getting the money myself"
That was a real gem of a lesson for all of us. One great instance of selflessness!
The word Switzerland conjures up images of snow capped mountains and exotic chocolates. In financial circles too, it had long been hailed as a benchmark for good old traditional financial wisdom and cautiousness. This jewel in its crown though is in danger of losing its shine and quite rapidly at that. An economist who goes by the name of Artur Schmidt has made what would be called as a rather sensational statement about the Swiss economy.
He has claimed that Switzerland's banks are so neck deep in trouble that the financial system might soon head the Iceland way. The country perhaps is paying the price of extending too many loans to the Eastern European nations and whose repayment is now being threatened by the rapid deterioration in the latter's currencies. Although other experts don't share Schmidt's views about the country going bust, they too are alarmed at the magnitude of the problem. It is simply amazing how greed got the better of even the most prudent heads.
A few days back, HDFC's Chairman Mr. Deepak Parekh had said that correction is bound to come in the real estate market. Almost on cue, India's leading realtor, DLF has started cutting prices. After reducing the price of its residential projects in Bangalore and Hyderabad, the company has now cut prices by 20% to 30% at its project in Chennai. Further, DLF might also cut prices in Gurgaon, Panchkula and Cochin. One of the ways in which the company is able to achieve this is by reconfiguring the size of the flats. These measures are likely to force other players to also alter their prices for existing and new projects.
It may be noted that while the price of real estate stocks have taken a severe beating in the past several months, real estate prices on the ground had not buckled. With no immediate revival of a slowing economy in sight, it was only a matter of time that real estate gave way as well.
Aluminum prices also declined, but to a seven year low yesterday on the back of concerns about the global recession deepening and thus taking down industrial metals like aluminum along with it. Another factor playing on aluminum prices is the slide in the price of crude oil. The metal being very energy intensive to produce tends to trend lower when energy costs fall. The weak demand from its main customer, the automobile sector, is also playing spoilsport as the auto companies are in doldrums and aluminum inventories have been piling up as a result. But the bright side of this conundrum of a crash in commodity prices remains that in the medium term, it will give a much needed breather to the margins of many industries as they see their input costs fall as a result.
Responding positively to the strength in the US markets yesterday, most of the Asian indices also edged higher today with the Indian benchmark, BSE-Sensex gaining a little over half a percentage point. Most of the major European indices are also trading in the positive currently.
"Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who have lacked these virtue." - Warren Buffett
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